In the commercial sphere, it is increasingly common to conduct transactions with entities that are exempt from being taxpayers under the Tax on the Transfer of Movable Property and the Provision of Services, which raises significant questions regarding their proper tax treatment. Proper management of these situations requires full compliance with tax regulations, particularly regarding the definition of the taxable event, fulfillment of formal obligations, and the scope of responsibilities incumbent upon the taxpayer.
In this regard, the Law on the Tax on the Transfer of Movable Property and the Provision of Services (LIVA) provides for two scenarios in which a party may be excluded as a taxpayer:
- When, in the preceding twelve months, the individual has carried out taxable or exempt transactions totaling less than US$5,714.29 and has total assets of less than US$2,285.71, a provision that does not apply to corporations, importers, or those operating more than one establishment that, collectively, exceed these amounts;
- In the case of the commencement of business activities, provided that the initial assets are less than US$2,285.71, excluding cases of imports and domestic shipments.
In this context, the legislature shifts part of the formal burden to the taxpayer who contracts with these entities, imposing specific obligations aimed at ensuring proper documentation and control of transactions. In particular, Article 119 of the Tax Code establishes the obligation to issue the Excluded Party Invoice, which must be generated based on the time when the tax becomes due and the nature of the transaction performed.
This aspect takes on special relevance in legal transactions involving the provision of services, where the correct identification of the time when the tax becomes due becomes decisive. The regulations distinguish between services of immediate performance and those of a permanent, regular, or periodic nature, which directly affects the timing of the issuance of the corresponding tax document. Inadequate handling of this matter not only affects compliance with formal obligations but can also lead to avoidable tax liabilities.
Additionally, these transactions may give rise to withholding obligations, as mechanisms designed to ensure proper tax collection. However, it is important to note that compliance with such obligations does not replace or exempt one from the proper documentation of transactions, which remains an essential tax obligation within the legal relationship with the taxpayer.
Tax documentation thus fulfills a function that goes beyond mere accounting documentation. It constitutes a key element that serves as evidence of the transaction’s existence, the determination of its tax base, and the correct application of tax regulations. Failure to meet this formal obligation may affect the deductibility of the cost or expense for income tax purposes, as it violates the requirements set forth in Article 28, paragraphs one and two, and Article 29-A, paragraph 18) of the Income Tax Law, and may weaken the taxpayer’s legal position in the event of tax audits.
From a penalty perspective, failure to comply with tax obligations in dealings with excluded parties constitutes violations that may result in significant financial consequences. In particular, the failure to issue and deliver the corresponding tax documents constitutes a violation under Articles 239 and 239-A of the Tax Code, punishable by a fine equivalent to 50% of the amount of each transaction, which may not be less than two minimum wages, without prejudice to the other violations and penalties provided for in the regulations. However, the legal framework also provides for mechanisms for voluntary rectification and mitigation of penalties, reflecting an approach aimed at encouraging the timely correction of non-compliance.
In conclusion, the proper tax treatment of transactions with parties excluded from the status of taxpayers for the Tax on the Transfer of Movable Property and the Provision of Services requires careful and strategic management on the part of the taxpayer. Adopting a preventive approach allows for minimizing risks, avoiding unnecessary contingencies, and strengthening the taxpayer’s position in the face of potential tax audits, thereby ensuring proper alignment between the business’s economic reality and the requirements of tax law.